How Small Biotechs Should Protect Their Interests During Mergers and Acquisitions - Early-stage companies need to assess whether a potential deal might unduly encumber the value of their intellectual


How Small Biotechs Should Protect Their Interests During Mergers and Acquisitions
Early-stage companies need to assess whether a potential deal might unduly encumber the value of their intellectual property

BioPharm International
Volume 21, Issue 1

Q: Why are mergers and acquisitions an increasingly attractive exit strategy for companies?

A: It's a good question because it raises the issue of why management at biotech companies appear to be so willing to sell their companies at an early stage. Historically, management teams at early-stage biotech companies were perceived as individuals who built companies toward late-stage development and ultimately commercialization, not people who are interested in selling off companies in M&A transactions. Today, however, biotech executives need to be prepared to assess all strategic opportunities available to the company, including an early M&A exit. With appropriate deal terms, an M&A transaction may in many cases serve as the optimal vehicle to ensure that promising drugs or technologies have a real chance to be fully developed, approved, and brought to market.

Q: How can an early-stage company best preserve its M&A options?

A: One of the most important things a company can do to preserve its M&A options is to preserve its intellectual property (IP) rights. In any M&A transaction, the acquiring company will seek to engage in detailed IP due diligence. Diligence will involve, at minimum, a review of the company's IP protection, its patent prosecution strategy, patent ownership, and freedom to operate issues (i.e., ensuring the product or technology doesn't infringe on the rights of a third party). Any transfer of rights to or from third parties would also be closely investigated, so early-stage companies need to assess whether a potential licensing deal might unduly encumber its lead programs or the value of its IP. Of course, every deal executed by an emerging biotech company potentially can encumber future transactions, including an M&A deal. Licensing early is a tradeoff between bringing in cash (in the form of upfront fees or milestone payments) and giving up rights that future buyers might deem important.

Q: How should small biotech companies approach collaboration deals with large pharma?

A: First, the smaller biotech company should build collaboration into the negotiations early if it believes it must retain control of its product's development and to gain shared control of the entire research program. For example, in the 2006 collaboration between InterMune and Roche, InterMune controlled the initial research development for its hepatitis C virus (HCV) lead candidate, ITMN-191, by exclusively conducting the Phase 1 clinical trial. After completion of Phase 1 trials, the HCV research program would transition into a co-development plan, subject to guidance and approval by the governance committees established by Roche and InterMune.

Second, the smaller biotech company may seek to leverage its innovative technologies and know-how to push for balanced sharing of responsibilities for co-developing and co-promoting the product. The larger company can provide most of the needed development infrastructure and clinical development expertise and the smaller company can learn much about these activities; the responsiblities and governance aspects of the relationship are shared.

The Roche–InterMune deal also illustrates that smaller companies are receiving an equal share of profits in the co-development territory, even if they fund less than half of the development costs. For ITMN-191, Roche agreed to fund 67% of the global development costs, but both companies will share profits on a 50–50 basis in the US.

Q: What rights should a small biotech seek to retain in co-development and co-promotion deals?

A: One trend worth noting is for smaller biotech companies to retain the right to opt-out of co-development or co-commercialization of the product. For instance, InterMune retained the one-time right to opt-out of either co-development or co-promotion of ITMN-191 in its agreement with Roche. Typically, if a company chooses to opt-out of the co-development of the product, it can retain its co-promotion option and receive royalties. InterMune's additional opt-out rights are evidence of the smaller biotech's growing leverage in collaboration agreements with large pharma.

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